why ‘too big to fail’ isn’t an antitrust issue

The latest issue of the New York Review of Books has a long piece by Paul Krugman on Timothy Geithner’s Stress Test. (Gated version; Krugman’s column.) Tl;dr: Geithner failed:

Geithner saw the economic crisis as more or less entirely a matter of lost confidence; he believed that restoring that confidence by saving the banks was enough, that once financial stability was back the rest of the economy would take care of itself. And he was very wrong.

Now, Krugman’s main beef is with Geithner’s lukewarm support of a bigger stimulus, which Krugman blames for the fact that the recovery never quite reached Main Street. But looking back on mistakes made in the financial crisis, I can’t help but think that our failure to deal with “too big to fail” isn’t at least as important.

At the time, of course, there were many calls to break up the biggest banks. Alan Greenspan said it. The Financial Times said it. Luigi Zingales called it “not unreasonable.” Of course, it never happened, and now the biggest banks are larger than they were back in 2008. (Yes, I know size isn’t the only relevant factor in systemic risk. But still.)

The most common proposal was to temporarily nationalize the banks before breaking them up and reprivatizing them. But there was another option, pushed most audibly by Simon Johnson and James Kwak: use antitrust to break them up.

Although it got some chatter at the time, including in Congressional hearings, the antitrust option never really went anywhere. My read is that Johnson didn’t fully understand, at the time that he suggested it, what antitrust policy today can and can’t do.

This comes out in a contemporary article written from the perspective of antitrust law:

‘The problem with trying to integrate a concern like that with antitrust policy is that antitrust is focused on the analysis of competition. And too big to fail is not really a competition issue. The domino effect is really the problem,’ said Andrew Gavil, a law professor at Howard University School of Law. ‘I’m not sure that antitrust is the right tool.’

…

‘It’s a set of policy concerns that don’t fit neatly into antitrust. And I’m not sure they would fit neatly into antitrust,’ said J. Gregory Sidak, chairman of Criterion Economics. ‘It’s not clear that whole apparatus is related to the issues people have in mind when they talk about a company being too big to fail.’

I have no doubt that this is true, given the current state of antitrust policy. But this was not always the case.

During the 1960s, for example, antitrust policy was trying to meet competing, sometimes conflicting, goals.

It was intended to promote competition with the goal of maximizing consumer welfare. But it was also sometimes used to protect small businesses, which could come into conflict with promoting competition. And if we go further back, to the Sherman Act of 1890, antitrust law was also aimed at limiting the political, as well as economic, power of big business.

In the 60s, economists did not hold a lot of power in the Antitrust Division. But those who were around tended not to like the more expansionary view of antitrust policy. The problem, from their perspective, was that it was irrational. There was no economic reason to protect small businesses; if larger firms could do the job more cheaply, that would be better for consumers.

During the 1970s, economists became much more influential in antitrust policy. And by 1977 their view of the purpose of antitrust policy—that it should be used to maximize allocative efficiency—had been reinforced through Supreme Court decisions like Continental TV v. GTE Sylvania and Brunswick Corp. v. Pueblo Bowl-O-Mat (love that one).

Economists were by no means unified over the appropriate level of antitrust enforcement. Though the Chicago School, let-’er-rip approach dominated during the late 70s, by the 80s game theorists were counterarguing that efficiency might actually require more government enforcement. But where they agreed was that considering factors other than the ability to exercise market power (e.g. the fate of small business, or the political power of big business) was likely to lead to antitrust confusion rather than clarity.

This may have been true, from the perspective of economic analysis. But as other purposes were defined out of antitrust policy, it removed a space for considering other kinds of effects of big business, like political power or systemic importance. And while we’ll never know if a more expansive definition of antitrust could have solved “too big to fail,” given the definition that we have, it was never really on the table.

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2 Responses

Nice post! US antitrust policy has always been about pricing power and hits its stride when dealing with predatory pricing. At the risk of pushing a metaphor too far, we don’t have many policy tools to worry about predators being to big to fail. If the large banks overtly or tacitly collude on price, FTC and DoJ can act with aplomb. But when they engaged in anti-predatory practices — lending mortgage funds to low income consumers who did not have market access in prior years — without having strategies to balance new systemic risk, our competition watchdogs don’t have anything to say or do.

Following the “experiment” of breaking up AT&T in 1982, the competition watchdogs have been more reluctant to break up firms based on size alone. In part, this was conditioned by paying attention to other countries where “abuse of dominant market position” must be proven instead of the “existence of dominant market position”, and where state ownership often protects large firms in ways that large US corporations are not shielded. Protection from systemic risk in the financial sector is better managed through other legislative action. Alas, Bill Clinton called for, and received bipartisan support for, the repeal of the bulk of the Glass-Steagall Act which had provided some management of “too big to fail” in the finance industries for 60 years. Clinton has spent much of the last decade claiming the financial crisis would have been worse without his intervention, but that is self-serving horse manure.

Thanks. And really, I think the move away from “bigness is badness” started even earlier — I have a NYT article from 1965 somewhere quoting antitrust chief (and first PhD economist to run the division) Donald Turner saying he wants to move from “bigness is badness” to “some bigness is badness.” Of course, since AT&T started around 1970 or whenever, it reflects the values of that era more than those of 1982.

I agree, systemic risk is kind of a different problem that probably requires legislation to fix (though hard even then!). But part of the point I wanted to make is that the narrowing of antitrust policy means it’s not even conceivable to use it (in its present form) to address things like the noneconomic power big business might have. The narrowing may be rational in some ways, but it basically eliminates one of the few potential tools for addressing such issues.

Also, someone pointed out to me that the same NYRB has a piece on Jeff Bezos and Amazon that compare it with the rise of A&P, which encountered antitrust issues in the 40s (http://www.nybooks.com/articles/archives/2014/jul/10/citizen-bezos-amazon/ — drawing on a book by Marc Levinson, who wrote the very organizational “The Box”.). A lot of that pro-small-business stuff was against supermarket chains — the high point for “irrationally” defending small business (well, one high point) was Von’s Grocery in 1964. Fun stuff.